Selvarajah [2008] NSWSC 1251

The mortgage included a clause providing for damages for late repayment. White J held this attracted the doctrine of penalties if, as a matter of substance, the sum payable was not a genuine pre-estimate of the loss the lender may suffer by being kept out of its money, but was in the nature of a punishment:

Whilst I can accept … the plaintiff may have been able to re-deploy its money at very high rates of interest of 60 percent or 100 percent or even 120 percent per annum, in the absence of evidence from the plaintiff, I would not conclude there was a market in which it could lend at rates of 240 percent or 360 percent per annum.

His Honour accordingly held that the provisions were void as penalties, as the interest payable as damages for late repayment was so great that it is out of all proportion to the damage which it could be inferred the lender could suffer as the result of the borrowers’ failure to repay the loan and the guarantor’s default.

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